6 turkeys to keep off your investing table

Commentary: There’s a lot of stupid stuff on the plate nowadays

BOSTON (MarketWatch) — When you write about stupid investments, you sit at the head of a big Thanksgiving table of stocks, mutual funds, insurance policies, and other products that give folks reason to expect a return on their money.

And like everyone else, I count my blessings at this time of year. As the guy who writes Stupid Investment of the Week. I’m thankful for the offerings I see in the investment world that qualify under some definition of the word “stupid.” These are products that are lacking normal intelligence, not clever, dazed, foolish, irrational, senseless, doltish, dim-witted, addlepated, and obtuse — for starters.

I’m looking for investments that are the opposite of smart. If that applies to investments you own or are considering, you have stepped into the danger zone. Once you’re there, it’s easy to make a stupid investment, thinking you’re making a savvy move.

Here are things which, as Stupid Investment of the Week columnist, I am particularly thankful for — but that anyone else would find unappetizing:

1. Good companies that are bad stocks

Stock investors are so busy looking for a good story that they forget the best story, namely that there’s no substitute for solid fundamentals at a reasonable price.

Right now, some sectors — most notably financial services — feature big names whose shares have been beaten down to what looks like a bargain.

But in many cases, these stocks are still overvalued, with more downside risk than upside potential. While no investor will have perfect timing — and you can take solace in the fact that you will own a quality company — current market conditions make it particularly easy to fall for a quality name at a bad valuation.

2. Undisclosed costs

This has been the year where seemingly every sales pitch for a goofy investment has been so focused on return potential that it completely ignores costs, or how the guy who is making the sales pitch will be paid.

If the investment turns out as promised, then buyers might actually find costs irrelevant. Think of it like a hedge fund, where management takes 2% of assets under management and then pockets 20% of the profits; those are disgustingly big numbers … unless the fund took that money and still put a 15% gain in your pocket.

The problem is that returns are unpredictable, but costs and expenses are usually set in stone. I have always figured that if someone is making it hard for me to see how and how much they get paid, they must be worried about how I’d react when I see the numbers. When I can’t find the costs easily, or when they’re not clear, my stupid-investment senses start to tingle.

3. Illiquid securities

At a time when many people think one of the big problems plaguing the market is high-frequency trading, a lot of investors seem to be falling for the opposite problem, and buying investments that rarely or never trade.

It’s definitely not the case that all illiquid securities are poor investment ideas, but when the lack of liquidity is pitched as a positive — or investors are simply encouraged to ignore it as a potential pitfall — common sense has been turned on its ear.

4) Mass-market products in areas where one size does not fit all

There are some securities — such as mutual funds — where the whole idea is pooling money to benefit everyone. Investors get the overall portfolio, sharing the costs of management and the benefits of diversification.

The opposite of that situation involves investment products where pooling resources creates an ugly situation for a customer. This includes most insurance plans sold on television, where a bare minimum of shopping around is almost always guaranteed to produce a superior result.

People who are scared about what might happen when they are asked questions about their health, for example, buy policies that promise easy acceptance. The problem is that those products are priced as if the buyer has one foot in the grave, meaning they’re not great for someone who is healthier than that.

6. Irrational exuberance

All too often, investors discover an investment only once it’s popular, by which time it may be ready to hit the skids. Some of the worst investment choices are the ones that appear to be can’t-miss opportunities because they are in a hot sector.

Gold, for example, looks like a strong investment, but average investors don’t need to take a chance on some junior mining penny-stock pitched in an e-mail. They should not risk coming up with fool’s gold when the real thing is what they want.

6) Spokespeople who don’t like answering questions

Recently I was at a conference and walked up to a booth in the exhibit hall. The first guy saw my tag as a media representative and said “You guys scare me.” I immediately got all of the firm’s paperwork, but I bumped into another sales rep on my way out of the booth; he saw my tag and his first reaction was “I don’t want to talk to the media.”

When it comes to uncovering a stupid investment, sometimes you just step in it. That’s what happened at that booth at the investor conference.

The minute anyone selling an investment can’t or won’t answer your questions or can’t give an explanation in plain English, it’s time the savvy investor should dig deeper and the average guy should walk away.

Remember, too, that if someone won’t answer all of your questions and ease your mind before they get your money, things aren’t likely to improve once they have your cash.

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